Ponzi Disguise #2: Fake Product or Business

Some Ponzi schemers will go as far as set up an elaborate facade of a business in order to lure people into the scheme. Either the product or the business itself is fake, but real enough to withstand "casual" scrutiny.

In 2008, Arlan Galbraith was sued by people, some of whom had invested up to 1 million dollars in his scheme, "Pigeon King", where he sold breeding pairs of pigeons to participants for up to $500, then promised to buy back the bred pigeons at $50 each. In reality, there is no market for the bred pigeons. Scheme died in 2008 when it was sued by investor and police also started looking at it as criminal fraud. He personally declared bankruptcy in 2009 and legal cases are STILL ongoing as of May 2012. According to BetterFarming.com, in one province over 175000 squabs (i.e. pigeons) were euthanized at taxpayer expense because there is no market for them and they cannot be released. No one has counts for similar operations in other Canadian provinces or in the US.

authority factor - if this person is a pillar of community, trusted adviser, etc. you will believe him or her. Ephren Taylor used his self-proclaimed title to very good use. And Galbraith traded heavily on his company name "Pigeon King".

likability factor - if you like this person (friend, family, colleague, etc.) you are more likely to believe him or her. In the case of Ephren Taylor, he apparently took advantage of trust and the willingness to do good by his investors.

This tactic is designed specifically so you will not look any closer and look through the mirage they are presenting. It can easily be combined with the first disguise to block multiple levels of inquiry, requiring one to really dig out the information.

The really really elaborate schemes, such as the Pigeon King scheme above, are NOT marketed as investments, but as business opportunities, which would often mislead authorities and individuals to NOT see them as potential Ponzi schemes. Local police later apologized for not looking into the business sooner.

Impossibly high and consistent return on investment? So what?

Ponzi Disguise #3: high and consistent returns

Ponzi schemes, because they don't really invest the money and thus is not affected by the economy per se, will offer consistent returns even when the economic climate changes. The Madoff Ponzi is infamous for offering excellent return for period of over 10 years, even as the economy dipped into recession. It was only brought down when several fund managers (who invested other people's money with Madoff) needed to withdraw money to cover their "real" losses in over investments, that lead to the discovery of the entire Ponzi scheme.

Ponzi schemes can offer high returns regardless of economic conditions because it is NOT affected by the economy, but solely by the amount of new capital flowing in (form new or existing investors). As long as incoming capital is more than outgoing capital (maturing investments) it can afford to pay a profit to participants.

What is "abnormally" high? Depends on the state of the economy. If the economy is barely growing (Consumer Price Index is the most often used guide, and last 12 months says 2.7% as of April 2012) Anything "double" this rate (5.4% annually) is interesting. Triple this and you go into "not likely" category. If you go much higher, you go into "no way" territory. Yet there are still schemes out there promises 1% or higher PER DAY, or double your money in two months, or such crazy claims.

Defenders of such scams will often explain these unexplained returns with "trade secrets", "secret algorithms", and so on. Indeed, Wikipedia entry on the Madoff Investment Scandal listed dozens of times analysts looked at Madoff's investment performance and simply chalked it up to Madoff's brilliance and even came up with their own explanations.

The high and consistent returns are often used as a selling point to pull in even more investors. However, it is never advertised to the public, but always passed on by word-of-mouth only. Madoff was famous in refusing to admit that he is managing any of the money, and does NOT appear on any fund listings as manager. But everybody knows it's his investment. So Madoff is using secrecy and authority at the same time.

I want to believe, a poster about UFOs in Fox Mulder's office (X-Files)

Gambler's Fallacy "the prices can only go up and not come down". People believed that about the real estate prices in California, Nevada, Florida, and so on. The result was the real estate bubble. When people wondered if the music is about to stop, some said "who cares, keep dancing". One such is Citibank CEO Chuck Prince back in 2007, just before the housing bubble went kaboom.

Preying Upon Fairness / Greed. According to McKenna, many of the people who perpetrate such scams are preying upon people's innate need for fairness (and greed). The victims are tired of seeing the rich get like 16% a year on special investments when they get only 1% in money market accounts. The victims think "Why not me?" And Ponzi schemers are ready to fulfill this "need".

"Once you have their money, you never give it back." For those of you who do NOT watch Star Trek: Deep Space Nine, it is rule number 1 in Ferengi Rules of Acquisition. McKenna pointed out that many of the "victims" who benefited from the Madoff scam (i.e. took out MORE money than they put in) are fighting tooth and nail against the "clawback" lawsuits seeking return of gains so it can be refunded those who have lost money.

McKenna's conclusion is that many of the "victims" are just WILLING themselves to be tricked by the right person and they can post-rationalize their decision, even into keeping the ill-gotten gains that they somehow 'earned it'.

Conclusion

Ponzi schemes have always preyed upon human weakness, and the expanding world of Internet and global economics only allowed it to reach even more people and finding more willing victims.

You can combat such schemes is to look past the facade, pierce the veil of secrecy, and look at what really is behind the the wall.

You can be skeptical about such opportunities, and not be a willing victim.